ROTH IRA conversion and recharacterization

Oftentimes it is advantageous from a tax planning standpoint to change an existing traditional IRA account to a Roth IRA account. This is known as a Roth IRA conversion. Roth IRA accounts and traditional IRA accounts have different advantages and benefits. As discussed previously, traditional IRA accounts provide an immediate tax benefit while Roth IRA accounts provide a tax benefit at the time of withdrawal.

A Roth IRA conversion would subject the IRA account owner to income taxes on the withdrawal from the traditional IRA account in the year that the conversion is made. As Roth IRA withdrawals are tax free, the account owner will not have to pay any additional taxes on Roth IRA withdrawals once the taxes on the Roth IRA conversion have been paid. A Roth IRA conversion should only be executed after careful analysis and tax planning has been done, with particular attention paid to income tax brackets in the current year as well as projected income tax brackets in future years.

In some other situations it becomes necessary to change IRA contributions which have already been made. This would occur when the account owner wishes to change traditional IRA contributions to Roth IRA contributions in order to take advantage of the benefits of the Roth IRA, or vice versa. A common example of a recharacterization is when an individual subsequently becomes ineligible for a Roth IRA due to exceeding the relevant income limits, after the Roth IRA contributions have been made. In this case, the account owner can recharacterize those contributions, and typically has until the tax filing deadline, including extensions, to do so.